Report: Closing the Inequality Divide

Back at the end of 2004, our nation’s leading economic indicator, the Gross Domestic Product, was soaring along at a robust rate of over 4 percent per year. The prospects for continued prosperity, the GDP figures suggested, seemed comfortably high. In fact, that apparent prosperity did not continue long. Within four years, our U.S. economy would collapse into the Great Recession and the “Great Stagnation” that followed.

Analysts have devoted considerable attention to many of the factors that fed that sudden, unexpected economic collapse. But few have questioned how our leading economic indicator, GDP, failed so utterly to warn us of the coming economic crisis. And few have pondered what other options for tracking our economic progress might better help us avoid a future economic, social, and environmental meltdown.

Fortunately, some observers have done this pondering — and then acted upon it. In 2009, with the economic crisis still ravaging the nation, Maryland Governor Martin O’Malley put in place a bold new economic indicator, the Genuine Progress Indicator, to begin to assess more precisely what has gone right — and wrong — in his state’s economy. The GPI provides a much more holistic view of how the Maryland state economy is faring for all Maryland residents than the standard state economic measure, the Gross State Product (GSP).

In Maryland, as in the rest of the United States, nothing has gone more wrong over recent decades than the distribution of income. The state and the nation have become staggeringly more unequal. Yet our standard economic indicator, GDP, does not track inequality at all. The top 1 percent can get ever richer, the bottom 99 percent poorer, and our GDP may measure only a “growing economy.”

In hindsight, we now see growing inequality as a key driver behind the housing bubble that triggered our financial industry meltdown. Our increasingly top-heavy distribution of income combined with the deregulation of Wall Street left millions of American families without the wherewithal to obtain low-interest traditional mortgages. That same top-heavy distribution left the nation’s most affluent with vast pools of excess cash ready to invest. Banks and other high-finance firms would compete vigorously for those investment dollars, rushing to market ever more exotic and risky securities that rested on reckless and even fraudulent high-interest mortgage debt.

We all know the rest of the story. “Too big to fail” banks bailed out with billions in taxpayer dollars. A vast evaporation of home, pension and other real wealth for America’s bottom 99 percent.

The Genuine Progress Indicator now in place in Maryland has income inequality as one of its 26 prime indicators. It also addresses inequality in other dimensions — such as access to quality education, public services and time with family. It should be noted and stressed that although the economic model does not include race and culture in its 26 indicators, significant racial and ethnic disparities exist in virtually all of the indicators of individual, family and community wellbeing.

Low-income households and communities of color suffer disproportionately from exposure to pollutants and toxins of all types because they often live in close proximity to such hazards. These harsh realities further exacerbate inequities of wellbeing.

This study zeroes in on inequality, in the context of the GPI, to answer the question: How has inequality affected the overall economic, social, and environmental fabric of Maryland, and what can be done about it? This study compares the current Maryland income inequality situation with the income picture back in 1968, the year that saw the narrowest overall income inequality divide in modern U.S. history. We then pose the question: How different would our current GPI indicators be — what quality of life would Marylanders enjoy today — had we kept the level of Maryland inequality at 1968 levels?

Our most fundamental finding: Inequality has imposed a very real economic drag on Maryland as a whole, a drag that, if left uncorrected, also promises a continuing downward spiral for Maryland’s poorest residents.

By the same token, if we could return income inequality to the narrower divides of the late 1960s, all Marylanders would enjoy very real and significant economic and social benefits. And this must be emphasized: The annual economic benefits of returning income inequality to 1968 levels would be equivalent to adding a whopping 22 percent to Maryland’s annual current Gross State Product.

KEY FINDINGS

Our key findings are as follows:

If Maryland returned to late-1960s income equity levels, an analysis based on Maryland’s GPI suggests that, all other factors being equal:

• A return to the more equitable level of income achieved in 1968 would generate over $65 billion in economic benefits (which is equivalent to more than one-fifth of Maryland’s gross state product of $300 billion) to the state each year in the form of personal consumption expenditures, decreased social and environmental costs, increased access to higher education, and additional spending by the poor.

• Such a return to 1968 income equity would have the effect of increasing earnings of the bottom three quintiles by $6 billion each, doubling the average household income of the poorest households from $15,000 to nearly $30,000 and generating nearly $49 billion in economic benefits to the state each year in the form of increases in the value of personal consumption expenditures.

• Additional spending by low- and middle-income families could add another $10 billion in economic benefits to the state.

• Depending on how many household livelihoods improve, another $7 billion in benefits could be generated through lowered costs of crime, family changes, underemployment, and vehicle accidents and increased benefits from consumer durables and higher education.

Maryland’s inequality has grown over the past few decades:

• Inequality in Maryland manifests in a wide income gap between wealthy and poor households. The wealthiest 3 percent of Marylanders earn 36 percent of the state’s income while the poorest 24 percent of Marylanders earn just 9 percent. There is also a wide income gap between white and black households and between white and Latino households.

• Inequality in Maryland also takes the form of unequal access to the good things in life — time spent with family and friends, quality education, reliable public services, modern household appliances, and opportunities for civic engagement.

• The poor, families and communities of color in Maryland also bear the brunt of environmental degradation, crime, family stress, unemployment, poor health, and unsafe living conditions.

• Inequality in Maryland is worsening over time. The costs of inequality have steadily risen since 1968 and are presently at their highest levels.

• Whereas our reliance on GDP as an indicator of economic health reinforces the widespread inattention to inequality, the GPI not only calls attention to inequality, but helps us to better see the myriad ways that it undermines our prosperity.

As other jurisdictions — such as Vermont, where the GPI is also in place– are beginning to understand, the GPI gives us data that the standard GDP (and, by extension, Gross State Product or GSP) does not. Put simply, the standard GDP functions like a giant calorie counter. The GPI, by contrast, can tell us which calories can make us healthier — and which might eventually kill us. Had the GPI been in place at the federal level in 2004, we would have likely had a metric that rendered a far more nuanced analysis of our genuine progress to date and of our future. By training our attention much more firmly on our widening inequality divide, the GPI might have been able to help us avoid the economic hardship and stagnation that ensued.

As this report demonstrates, the GPI also offers an important lens to rethink policy. Policies that advance fair taxation, full employment, environmental justice, and access to higher education could substantially level the playing field and give those with the least economic resources a fair chance at sustainable livelihoods for their families. Maryland’s new GPI, this brief demonstrates, offers a means to assess both the costs of inaction and the benefits of moving forward with these progressive reforms, and to clearly convey these costs and benefits to decision-makers, investors, and the public.